The Gilmo Report

July 8, 2012

July 8, 2012


The “magic” of Technical Analysis 101 allows us to see that the market spent Friday in a rather normal reaction pullback after a blistering five-day leap from the bottom of its uptrend channel, as I’ve drawn it on the daily chart of the NASDAQ Composite Index, below, to the top of the uptrend channel where it found resistance. The gap-down move on Friday looks a bit like a “slap down,” but while the NASDAQ picked up a little more volume for a distribution day, it still was able to close off the intra-day trading lows. Meanwhile the NYSE traded less volume than Thursday, enabling the NYSE-based indexes to avoid a distribution day. Most of the carnage was seen in technology stocks, particularly cloud-related names like VMW and FFIV after Informatica (INFA) announced poor results indicating a slow-down in the space. Despite this, my list of leading stocks held up well amid the mixed action of the indexes. So it remains an issue of watching your stocks. I tend to think that a weak BLS jobs number might have provided a ready alibi for the market to sell off on, particularly given the expectations created by a strong ADP employment number the day before. But in my view a weak U.S. economy is evidence in favor of the Romney Rally theory that argues for a market rally phase from now until the fall.

NASDAQ Gilmo Report Stock Chart

The bottom line for me as far as the market is concerned is that within the context of the prior, sharp rally off the late June lows of last week, a pullback is not only likely, but probably necessary, and it becomes more a matter of watching one’s stocks. Surveying my own favorites, we see that LinkedIn (LNKD) bucked the general market on Friday by closing up on the day as it found some minor volume support at the 10-day moving average. On a day when buyers might not be expected to step up to the plate, there certainly was not enough selling pressure to send the stock lower. Ultimately I still see the 50-day moving average, now at 103.63, as the current line of support for the stock. For now money seems to be more interested in coming into the social-networking space than leaving, but of course that could change at any time. On the other hand, if one is long LNKD and up on the stock, there is certainly no evidence to support the conclusion that the stock should be sold right here, right now.

LinkedIn (LNKD) Gilmo Report Stock Chart

The big social-networking stocks both made a decent showing of themselves on Friday as Facebook (FB), the de facto “big-stock” social-networking name, also closed up on the day. As can be seen on the daily chart of FB, below, selling volume dried up to the lowest level in the entire pattern along the lows of this recent pullback that is forming a handle to FB’s little cup formation. Sellers could not take the stock down Friday as it pushed up towards its 10-day moving average in the face of a general market sell-off, and this seems to me to be significant given all the skepticism regarding FB’s future potential. With FB just under the 10-day line, currently at 31.81, I am watching for the stock to trade through this level on more than 28,599,500 shares in volume, the highest down-volume in the pattern over the prior 10 days, for a strong pocket pivot buy signal.

Facebook (FB) Gilmo Report Stock Chart

Coinstar (CSTR) gapped-down with the rest of the market on Friday but by the close pulled to within 17 cents of the flat-line as volume declined sharply. CSTR remains well above the top of its recent base from which it broke out at around the 67 price area, as we see on the daily chart below. The stock never came under any serious selling pressure on Friday and as sellers failed to materialize throughout the day the stock slowly worked its way back towards the UNCH line. Again, no objective evidence that indicates the stock should be sold. In fact, CSTR could conceivably pull back to the 67 level and still keep its recent breakout intact. If one is in the stock from the pocket pivot buy points of six and seven days ago, then one has a comfortable cushion to work with here.

Coinstar (CSTR) Gilmo Report Stock Chart

Apple (AAPL) also retains its comfortable cushion if one entered the stock near the pocket pivot buy point of five trading days ago. AAPL looked good when I discussed it in my mid-week report of July 4th, and on Thursday it moved sharply past the 600 price level, as we see on its daily chart below. The stock held the 600 price level well on Friday despite a lot of selling in technology names and the NASDAQ Composite Index, which bore the volume brunt of the selling that day. AAPL pulled back about 2/3rd of a percent and closed reasonably well, particularly within the context of its prior four day leap up through and beyond the 50-day moving average. So far there is nothing exceptional here beyond a four-day move followed by a one-day pullback. As we approach AAPL’s earnings announcement on the 26th we can decide what to do with the position, but for now it acts fine.

Apple (AAPL) Gilmo Report Stock Chart

Mellanox Technologies (MLNX) was the worst performer on my list of leaders Friday, but in the context of its recent move to all-time highs the pullback looks quite normal. MLNX likely also felt a little bit of the heat slamming other cloud-related stocks like VMW and FFIV, as well as the recent saber-rattling from Iran which successfully tested a missile it says can reach the “occupied lands,” a euphemism for Israel. MLNX is an Israeli company that trades on the Israeli stock exchange and so the ebb and flow of global politics as it plays out in the Middle East can have some influence. In any case, the selling came on 4% higher-than-average volume and so can’t really be considered heavy, but I could see the stock pulling down to 70, maybe a little bit lower, given its character to pull back sharply after strong upside moves. This will likely depend on how much more follow-up selling, if any, we see in the general market next week.

Mellanox Technologies (MLNX) Gilmo Report Stock Chart

Seattle Genetics (SGEN) also pulled back constructively on Friday with volume drying up sharply, as we see on the daily chart below. This comes on the heels of Monday’s pocket pivot move up through the 10-day moving average. So far, SGEN is holding the 10-day line with the volume levels approaching those of eight trading days ago. Then, selling volume dried up in the extreme at the lows of a short pullback following the rapid run-up through the 21-22 price level in early June. On a weekly chart, not shown, the pattern is showing four weeks in a row closing very tight with the first week being the “pole” and the past three the formation of a high, tight flag that is in fact high and tight so far. If the market continues to sell off maybe SGEN simply continues to move tight sideways. But in a continued uptrend, the stock looks like it wants to move higher, and probably sooner rather than later, but for that we’ll have to see how the action plays out this coming week.

Seattle Genetics (SGEN) Gilmo Report Stock Chart

I recently felt that the Monster Beverage (MNST) violation of its 10-day moving average was a reason to sell the stock and wait for it to build a new base (see June 24th report). Since then, the stock has pulled back but has managed to hold above its 10-week or 50-day moving average, as we see on the weekly chart below. MNST came down fairly hard off the peak for the first two weeks down in a new base, but the second week closed above the 10-week line and in the upper half of the weekly trading range on very heavy volume. I would call this strong weekly volume support, and the stock confirmed this constructive action this past week by holding in a tighter range and holding above the 10-week line. This is constructive action in what is so far a three-week base, so I think MNST bears watching here. On a daily chart (notshown) MNST pulled back on Friday on extremely light volume to retest the 50-day line, which it held. It then closed back above the 10-day moving average, setting up the possibility of a pocket pivot type of move off the 10-day line. This is certainly something to watch for, although it is still possible that MNST needs to build a longer base before it can move higher. Or it may simply need to work off the overhead supply from the large volume of buying that occurred in late May when the stock spiked over $80 on rumors of a Coca-Cola buyout of MNST.

Monster Beverage (MNST) Gilmo Report Stock Chart

Way back when the market was correcting after August of 2011, Fossil (FOSL) first began hitting my short-selling radar with its initial break off the peak at that time, as we can see on its weekly chart below. This of course did not pan out like the head and shoulders top it was looking like by the end of 2011. It turned back to the upside in January and rallied back to new highs to form the right side of big Punchbowl of Death (POD) formation that is simultaneously the head of another head and shoulders formation as I’ve outlined on the chart. Over the past seven weeks the stock has been locked in a reverse flag as it has swung from the highs to the lows of the flag’s price range. This is a very weak stock, in my view, and primed to go lower if the market continues to do so, but it might even continue lower if the market continues higher. The 10-week (50-day) has crossed below the 40-week (200-day) for a “black cross,” so my guess is that if FOSL is going to break down further, this is likely where it is going to do it. If I felt like I needed to go short, FOSL would be one of my first targets, using a 3-5% maximum upside stop.

Fossil (FOSL) Gilmo Report Stock Chart

While the true leaders in this market continue to hold up well, it is a fact that a number of former leaders remain flat on their backs, FOSL being one of them. On Friday we also saw reverse-flag breakouts in F5 Networks (FFIV) and VMware (VMW), both of which were clocked on heavy volume. These look very weak and possibly could be shorted as well if one uses a reasonable upside stop, but I would likely prefer to go after a weaker pattern like FOSL’s. On the other hand, with the market still in a confirmed uptrend, I prefer the long side of the market until further evidence proves otherwise. So far, one day’s worth of selling after a sharp five-day run-up off the lows of two Thursday’s ago doesn’t warrant an over-reaction. Thus there is no reason to over-think things, just watch your stocks and see how the action pans out in the coming days as this pullback could just turn out to be an opportunity to add to key positions as they come in a bit in price. Stay tuned.

Gil Morales

CEO & Principal, Gil Morales & Company, LLC
Principal and Managing Director, MoKa Investors, LLC
Principal and Managing Director, Virtue of Selfish Investing, LLC

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